Hurricanes. Tornadoes. Floods. Blizzards. Fires. When disaster strikes, companies often rely on business interruption insurance to cover lost profits and extra expenses incurred as a result of the catastrophe. They also often rely on a forensic accounting expert to guide them through the complex process of calculating lost profits and filing the necessary economic damage claim.
“The aftermath of a disaster is a trying time for any business,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley, including development, implementation and management of comprehensive contingency and disaster recovery plans.
“Amid the turmoil, determining how to calculate lost profits, analyzing the extra expenses and assuring the insurance claim is properly filled out are responsibilities best left in the hands of a forensic accounting expert.”
Anderson said that in order to make an economic damage claim, a forensic accountant must calculate what the business profits would have been during the business interruption period had the disaster not occurred and then compare that with the actual profits of the business during the same period. The difference represents the company’s lost profits.
The four most commonly used methodologies for calculating lost profits are the Before and After method, the Sales Projection method, the Yardstick method and the Market Model method, said Anderson, who provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.
- The Before and After method determines whether pre-disaster profits were growing, declining or level in order to calculate what the profits would have been during the business interruption period. The forensic accountant then compares these profits with the actual profits after the disaster occurred.
- The Sales Projection method relies on forecasts and budgets the company had for the business interruption period, analyzes the past accuracy of forecasts and budgets, and calculates lost profits based on the analysis.
- The Yardstick method usually applies to businesses with little history (for example, a company that started business a month before the disaster). Under the Yardstick method, the forensic accountant analyzes profits of companies in the same industry to calculate lost profits.
- The Market Model method typically is reserved for companies large enough to have a measurable share of their local or national market (for example, one of the Atlantic City casinos that was affected by Hurricane Sandy). Under the Market Model method, the forensic accountant compares the overall market share of the company before the disaster to the market share during the business interruption period to calculate the company’s lost profits.
Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said forensic accountants also work to identify and calculate the extra expenses the company incurred to recover from the disaster. For example, he said, qualified extra expenses might be cleanup costs or the cost to re-enter lost computer data.
A forensic accounting expert also can assure that a company’s business interruption claim does not include disallowed items. Anderson said that when an F2 tornado destroyed one of his client’s corporate headquarters and primary warehouse, the company continued to pay employees during the two weeks it took to relocate to a temporary facility, even though most employees stayed home or worked only part time.
The company included the wage payments in their economic damage claim, but Anderson discovered that the policy covered only wages for actual work performed. As a result, the client adjusted the claim. Had they not done so, Anderson said, the insurance company would have disallowed the expense and required the company to revise the claim, causing payment to be delayed.
Anderson, whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, recommends that companies consult with a forensic accounting expert to assure that their business has a comprehensive contingency and disaster recovery plan in place before misfortune occurs.
“Recovering from a disaster can be very difficult and very stressful,” said Anderson. “Forensic accountants can help companies prepare for the worst. And should disaster strike, your forensic accountant can lessen some of the pain by guiding you through the complex process of filing a business interruption claim.”
If you require a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, contingency and disaster recovery planning, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.